Canada dollar ends weaker on U.S. budget fears, current account data

Alastair Sharp

4 Min Read

TORONTO (Reuters) - The Canadian dollar weakened against the U.S. dollar on Thursday, hurt by comments from a top Republican lawmaker that cooled hopes for a deal to resolve a looming U.S. fiscal crisis, as well as data showing a near-record current account deficit.

The weakness in the currency, often a proxy for the prevailing appetite for riskier assets, was tempered by earlier data that showed U.S. housing starts hit a four-year high in October.

“We had a few pops here and there, mainly driven off of, first the data and then speculation on how the fiscal cliff negotiations are advancing,” said Camilla Sutton, chief currency strategist at Scotiabank.

“We’ve definitely had a volatile session, however the overall range has been fairly tight,” she said.

The Canadian dollar ended trade at C$0.9928 against the U.S. dollar, or $1.0073, weaker than Wednesday’s North American session close at C$0.9919, or $1.0082.

The “fiscal cliff”, in which $600 billion of spending cuts and tax increases are set to kick in early in 2013 unless Congress brokers a deal, is one of the biggest risks facing the markets in the final weeks of the year.

House of Representatives Speaker John Boehner said there was no progress on Thursday in talks with U.S. Treasury Secretary Timothy Geithner and criticized President Barack Obama and Democrats for failing to “get serious” about including spending cuts in a final deal.

Currency and equity markets have in recent weeks gyrated with each utterance suggesting either progress or a lack thereof in the fiscal talks.

TALK C$ OVERVALUED

Another negative for the currency was news a drop in exports helped push Canada’s current account deficit close to a record high in the third quarter, a development that some analysts said sends a signal that the Canadian dollar is too strong.

“Despite continued foreign investment inflows into the Canadian dollar, trade fundamentals continue to suggest overvaluation,” Emanuella Enenajor of CIBC World Markets Economics said in a note to clients.

The Canadian dollar is up more than 6 percent versus the greenback since the end of 2009 and more than 60 percent over the last decade.

Citing the big current account deficit and other signs the domestic economy is struggling, BMO issued a report estimating that the Canadian dollar, “the titanium of the currency world”, is at least 10 percent stronger than current commodity prices dictate it should be.

Benjamin Reitzes, BMO’s senior economist and foreign exchange strategist who co-authored the bank’s report, cautioned that a currency can be misvalued on a fundamental basis for a very long period of time.

He said this could be the case for the Canadian dollar until 2015, when the U.S. Federal Reserve is expected to start hiking interest rates, triggering a gradual U.S. dollar rally.

Until then, “unless you see some significant global economic weakness and softness in commodity prices, you’re not going to see any meaningful selloff in the Canadian dollar despite the fact that we believe it’s overvalued,” Reitzes said.

MIXED ON THE CROSSES

According to a recent Reuters poll, many analysts believe the currency will hold close to parity for the coming year, helped by Canada’s triple-A credit rating and the resulting inflows of foreign capital. <CAD/POLL>

Canada’s performance on Thursday was mixed against other major currencies. It outperformed the Australian dollar and the Japanese yen, but underperformed the euro and British pound.

Prices for Canadian government debt were higher, with the two-year bond up 2 Canadian cents to yield 1.082 percent and the benchmark 10-year bond added 10 Canadian cents to yield 1.707 percent.